Automotive Axles Limited (505010) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon, and welcome to Automotive Axles Limited call organized by Bativala & Karani Securities India Private Limited. [Operator Instructions] I would now like to turn the conference over to Mr. Sailesh Raja. Thank you, and over to you, sir.

Yes. Thank you, Sinha. Good afternoon, everybody, and thank you for joining this for Automotive Axles Limited Third quarter of FY '21 Earnings Conference Call. During this call, from the management side, we'll be hearing from Mr. Thimmaiah, MD and CEO of Meritor India; and Mr. Kumaradevan, Senior VP and Holding Director, Automotive Axles; and Mr. Ranganathan, CFO, Automotive Axles Limited. Now I would like to turn the call to Mr. Thimmaiah for the opening remarks before Q&A. Sir, you may begin.

Good afternoon to all. First of all, welcome, and thank you very much for taking time out and participating in our company's investor relationship call. So what I'll do is, as you know, in the end of the day, there are a lot of questions will come. I will try to answer those questions. And now I'll hand over the presentation portion to Kumar, who is Executive Director for Automotive Axles; and also we have Ranganathan, CFO of Automotive Axles, they'll run through the presentation, then I'll pitch in for the question-and-answer session, please. Over to Ranga.

Yes. Kumar, can you take the first 2 slides?

Yes. Okay. So good morning, everyone. This is Kumaradevan. So let me start the presentation with a snapshot of financial year '20. As we know financial '20, we had a revenue of INR 960 crore INR with an EBITDA of 1.51 crore, 10.5% and PBT INR 59.9 crore. I think the other points like manufacturing locations, you all know, we have 4 manufacturing locations. And I about the company, it's a joint venture between Meritor and Kalyani, 33.5% each and public 29%. We are having workforce of about 2,000 plus. And all our customers include all major commercial vehicle players and also specialty and defense within [ legitimate ] manufacturers. We continue to retain our #1 position in axles, and we are #2 in brakes. Going forward, with respect to the market, I think I may not repeat, I guess. I think all of you know the kind of diverse market that we are catering to. And our customers include all the major OEMS, both domestic and the international market. Similarly, we have a very comprehensive product range, both in axles as well as in brake. So we sold the product requirements starting from light up to the extra heavy vehicles in both MSC as well as SJ category. So with that interaction, I will request Ranga to carry this forward covering the financial aspects, and then I'll come back on the other things later.

Yes. Good morning, good afternoon, all. As far as our financial performance, Q3 is concerned, we did about INR 273 crores in the Q3 ending December, with this compared to last year's same quarter is about 64% increase EBIT. As far as the EBITDA is concerned, last quarter, it closed with 9.9%, more or less similar performance compared to the last year. The only point this time to the steel price increase is probably a commodity price increase on all factors, which is influencing the EBITDA margin as a percentage. And as far PBT is concerned, we closed this quarter at 6.3% as compared to 4.1% last year same quarter. Overall, why did it concern our pre-order, concerned, all of you know that first quarter was very bad more or less wiped out. So 9 months, we have finished with 486 crore INR, and -- which is relatedly about 38% lower than last year. As for EBITDA is concerned, we are at 12.6% as compared to 10.9% last year. In terms of absolute values, we are, of course, the left by about 69%. PBT is concerned, whereas minus 1.2% compared to 6.9% and last year, more or less, the last 2 quarters profits have come close to quarter, hopefully, the Q4, we are retaining possibly to bail it out. When it comes to the very high level performance, the revenue and EBITDA and EBIT is already there. The previous slides are not repeating again. So as we said, the pellets have increased by 64%. Those sale in grind production run rate, basically, as we see the Q1 to Q2 is about 300% and last quarter was about 80% for both Q2 and Q3. And we are expected to, based on the current estimates, we expect it to, based on the current estimates, we expect it to improve this, like on here, for some [ audit in Q3 ] So Q4, we are going to grow from [indiscernible] compared to Q3, is what basically the estimation, management or plan. So as far as other improvement point, as we always do, is about -- our focus, continuously, on the grow revenue is always there. We are working on it, and we are also seeing a quite positive movement from the volumes. And our continuous focus on revenue improvement, cost reduction and new product development, definitely are now working towards our strategy of Mission 25. That is really building in the improvement in the profitability. If you could compare the cost parameters compared to last year to this year, definitely, we'll see that a lot of good improvements is happening in both expand commercial costs and also the energy cost level. The PBT cost is more of in control. So it's also giving good amount of leverage coming to PBT. That's probably -- we'd have seen that, the EBIT level, the substantial improvement in this quarter. So our focus continues to be on cost control and process and productivity improvement that definitely drives both the top line and the bottom line. So with this brief highlights, I'll give it to Kumar once again to take the rest of the slides.

Thanks, Ranga. So to summarize, I think our focus on fee initiatives come under the 3 major pillars. One is to drive the business growth with various initiatives. Number two, cost reduction initiative. Number three, to ensure safe working place so that we can continue to operate efficiently and effectively. And to the first vertical business growth strategy, we are working very closely with all of our existing customers as far as few new opportunities to ensure new business wins that should be taking place. So that is one major subproject that we are driving. Secondly, a number of new product development initiatives and new platform plus lots of new variants are being or done. And with those, we are gearing up internally to meet the various diverse customer requirements. We are also looking at -- very closely at the e-mobility business opportunity. We are working with customers as well as internally to get ready with the products and variants. Again, one other initiatives is utilization. Industry 4.0 is being driven intensely in our -- all our shop, which will make our products a lot more reliable, a lot more efficient and effective in terms of making the customer requirement. Also, as you all know, we proactively created capacity. So we are working with the strategy of lean capacity in order to capture the market opportunities that is now happening going forward. Similarly, cost measures, I think we have talked a lot in the previous quarters also. We continue to drive all those cost reduction opportunities, covering material costs and those manufacturing costs, overhead cost, et cetera. So this will be our continuous focus. We will drive all those sub-initiatives and projects under various categories. The third one is -- which is very important versus foremost basic requirement in terms of safe operating environment in all our manufacturing locations. COVID was a major challenge for many of us. We were very happy that we could successfully manage the situation and all of our manufacturing locations. Ran, even under COVID situation, very effectively and efficiently, following all the safety, non-common safety protocols, all the new norms, what we have established. The management side, we provide a lot of other incremental infrastructure requirements to come back COVID situation. So with that, I think we have successfully come out of the issue, and we are managing all our operations efficiently. So going forward, I think as we mentioned last time, we may have explained in detail in the previous meeting. Our growth is driven through our Mission 25 strategy. So we have 5 verticals unto this Mission 25, growing revenue, enhancing profitability, new disclosed links through new products, et cetera, operational excellence and customer value proposition. So all the 5 verticals are being driven with the number of initiative. And we have metrics and targets for each one of those initiatives for the next 3 to 4 years. All of those initiatives are going on track at this point of time. And we are confident that all these things will result in revenue growth, business growth as well as enhancing the bottom line. So finally, I'm also very happy to share with all of you, very proudly, that our MD, Thimmaiah Napanda, has been recognize the Economic Times said, "As one of the most promising business leaders of Asia for 2020." I think this is a recognition he got recently about that in 2 months ago. And we are all very proud about it, and we are very proud to share that information with all of you. So that's it from us from presentation point of view. I think we will now open for question and answers.

[Operator Instructions] Our first question comes from the line of Mr. [ J. Kair. ] From Elara Capital. ]

Congratulations to Thimmaiah for winning that award. My first question is regarding your top line, I mean you have, consistently, in the last couple of quarters, outgrown the M&A series production growth. I think that could also be led by some of your new business wins, one of which could be deferred or suspension. Now if you just talk a little bit about how much contribution you've seen? How are you seeing the new business wins? Any incremental products that you'd won also in view 6 is you have substantially gained orders for some of these new components, which you had alluded in the last few calls.

Okay. Thank you very much. I can really appreciate that gesture and wishes. I think if you can see the way we look at the market, this full year, we are expecting the market to be down by around 27% compared to last year, which is the 7.5 ton and above commercial vehicle market. Even though you can see the Q1 and Q2 was almost like a wash, a little bit of recovery happening in Q3 and we are seeing Q4 is looking better. So for around 20%, 25% de-growth still compared to the last year. And we are projecting our revenue will go down by around 10%, 12% level if you see what you indicated in the last slide. That's what you are recognizing it. Maybe you wanted to know how are we going to do that. I think if you really see our Mission 25 strategy, one of the key pillar is grow revenue. And we are doing a lot of things. Some of them are -- already, we are seeing a result, and that's why the top line is not eroding compared to the market. And some of them will come in the future, depending upon how the business pays for each one of these new initiatives we are working on. That said, our major -- where we were able to outgrow the market is coming from our improvement in our share of business with many customers. Both from axle and brake side. And also, we have launched and in the process of launching new products in the market, again, related to axle at this point of time, that is also providing us a significant uptick in terms of our revenue growth. The new verticals and some of them are also coming from the industrial and military applications. Unfortunately, for new people, fortunately for us, we don't view the split up of where exactly the revenue is going to come from, I can only give the pointers from where these things are happening. Still, in terms of suspension, even though it is a big thing for us, we have not had seen a big uptick in suspension products. That is what's going to happen in the coming quarters or coming year. Because of the transition from BS-IV to BS-VI, the OEMs want to stabilize the product first. And suddenly, the market has come back, and the volumes are not able to deliver because of various reasons, the supply chain issues, the steel issue, et cetera. Any new thing, which is going into the market has taken a little bit of backfit because of OEMs and all of the people and are able to manage. Renewal growth from suspension perspective is going to come maybe next year.

Okay. Okay. Sure. Sir, my second question is regarding the export opportunity. I mean, a couple of quarters back, you had mentioned that post the COVID, the pace of new order wins and exports could kind of take a pause? Or there could be some relook at -- because of the various plants or various companies globally are also operating at lower utilization, specifically for Meritor. And hence, the sourcing from India could go on a little slowly as far as what you had earlier expected. Now with things largely settling down on the COVID front and demand bouncing back, how are you seeing the new orders from the export businesses, either from Meritor's global plants or from new customer wins like I think you had mentioned about Walworth, Thailand. How are you seeing that ramping up? And if you could just speak a little more about any more business opportunities in export side that you've won in the recent quarter?

Yes. No, I think you rightly mentioned, we were a little bit of skeptical in the -- when we spoke in the couple of quarters back. But if you know, all the markets are coming back. I think if I give you an overall rough figure the world market in the commercial vehicle is probably up by around 25%. So that has been unchanged quarter-over-quarter, et cetera. So that is the kind of market growth we are seeing in Brazil, we are seeing in North America, we are seeing in Europe, Australia, India, China, et cetera. That has given us some good news for sure. Our strategical is not there now. I think our export order book is increasing. That is also one of the reason, again, we can't give a split of how much we are doing domestic and export, and how much of the growth is coming from export and domestic, we will not be able to give that much detail. But the export order book is also looking very positive.

Okay. Okay. And just in the last one, if you can speak a little bit about your new verticals, let's say, depends of IV, any traction that you are seeing post-COVID now, especially on the defense side? That was my last question.

The defense side. There is lot of traction, as you know, as we are seeing the newspaper and the government, what they're trying to do is. Number one, they're trying to modernize the fleet and also, they're trying to upgrade the vehicle, which is a multi-accent vehicle. So I think there's a lot of traction, sir, happening. But as you know, the gestation period in the difference is really long. We are seeing the order book for defenses and an increasing trend, but still we are not seeing significant uptake or the manufacturing activity from our OEM perspective happening. But I think the future looks good. There are a lot of -- multi-axle vehicles are under validation and testing. And as you can know, it takes a lot of time for the validation itself, the difference. So we are happy that there is one on the defense side is going to grow. And industrial, which is a highway for us, that is one growth area we have identified. And we are going to develop products and also launch new products. If you really ask me, currently, the revenue doesn't still incorporate a lot of new things from these vertical set. This is probably -- will start kicking in from next fiscal year or maybe a year later on these new verticals. And also we are exploring, which, again, I can't tell you which vertical or area we're trying to explore. We're exploring a lot of other product -- products, which is not excellent breaks. We are, again, last time also I told you that we are in the process of developing the business plan, business case. And only if it makes sense, and if we can retain the profitability and also grow the revenue, then only we will launch those verticals. But we are in a continuous evaluation in the phase to see that what works and what doesn't work.

Our next question is from the line of Mr. Sunil Kothari from Unique Investments.

Congratulations for getting this award which you people really deserve. Sir, my question is just broadly, I wanted to understand the way you take efforts to reduce cost, improve your productivity, improve your processes, the way you do innovation. These cost benefits will remain with automotive axle? Or because we have a very strong customer, two mainly, one is American, second via vehicle, this, [indiscernible] in. What was cost-benefits we have to share with them. And if it is so, then how much benefits we are able to keep and how much we have to save, if you can broadly make us understand?

There are multiple type of cost reduction, we have constituted in our company. Some are purely the productivity linked, which is optimization in the manufacturing setup, reduction of number of rights, in terms of automation, et cetera. That is one kind of cost reduction activity we do, which is an ongoing basis kind of a cost reduction. The second is the sourcing kind of way, sourcing cost reduction, which is trying to find and automate. So -- with our suppliers to reduce the cost for them, optimize for them, et cetera. The third is the design-related cost reduction, which means we continuously upgrade our existing products into the new product. And our goal is to enhance the performance through the new products, reduce the weight, then reduce the cost. So some of them are -- we retain ourselves, some of them like mainly the product-related one. It is also we want to make our OEMs successful, our customers successful. So on the new product side, if there is a significant cost reduction is happening, we also like to pass on to the customer so that they also get the benefit of the new product activities, what we do. Otherwise, also, there will be no interest for them to validate and approve the new products. So we want to give for them some interest so that they can approve the new product. So it is case-to-case basis. We decide how much we pass on, how much we retain, what we pass on and what we retain. But to summarize, it would build both variety. There are certain areas we pass on to the customer. There are certain areas we retain as part of our productivity improvement.

Okay. But sir, this -- the way you are taking efforts, will it be reflected maybe over the next 3, 5 years. You have respectable margin. Respectable meaning you are a technologically company, very superior company. So you take any other good engineering auto component company who is respected in this part. The EBITDA margin is always between 15% to 20%. So is there any -- our objective, our aim, our target? Can we -- I'm not asking you to confirm any numbers, but is there any upward possibility to get the benefits of all the efforts, what you are taking?

I will not be able to tell you whether we'll get to 15% or not. But only point that I can give you is, see, last quarter, Q3, for example, we are operating at around INR 207 crores, INR 273 crore, which is still -- we're operating at around 50% capacity utilization. And at that level, we are making, say, around 10% EBITDA. If you -- any other company, if you see, I'm just saying, right, if you're not one of the good companies in our spot, automotive space, operating at around 50% capacity level, making 10% EBITDA, which is more -- it is not a significant deterioration compared to what we used to do when we were doing, say, around INR 400 crores turnover. So from there, if you see that even though the capacity utilization or top line has deteriorated because of all these pandemic things, we were able to maintain the EBITDA. Now the question is when we -- again, when the market comes back and when we do probably 60%, 70%, 80% capacity utilization happen, will, thus, everything absorption will come back and give us the benefit in the form of EBITDA? I would say not necessarily because we also, in that time, we will start starting investing into new things, new products and new activities. And then also the customers will also come back to us and asking for some reduction, et cetera. So it's a combination of all these activities, which will probably a little bit of, put constraint for us to show everything in the EBITDA. But one thing is we will continue to grow for sure. If the INR 300 crores goes to, say, INR 400 crores in the market, because the market and because of core penetration, et cetera, definitely, our EBITDA growth will be more than the revenue growth.

So that is very, very, very well understood and well said, sir. Sir, my second question is, you talk a little bit about this -- somebody's first question answered is exports opportunities. My question is larger. Sir, because of this China-related issue, globally, we are now -- automotive accelerated approval in terms of quality since long. And we are now introducing new products. We are improving a lot in terms of our capability of cost, in terms of cost to offer to our customers and best quality products also. So how is this larger opportunity? Can we become a nonauto-related new products, maybe depends or maybe not non-role [ off-road ] which you are saying. Those can become a sizable chunk of the revenue over maybe next 5, 10 years? That is a focus area of new products, new market, exports and if you can qualitatively talk more about these efforts we are taking?

Yes. One thing I can tell you that we will -- we are not looking at diversifying, I would say that the commercial vehicle space. And that's not our focus at this point of time. We want to focus within the commercial vehicle space. What is going to happen in the future is, of course, we will work with the OEMs to see that what need to be offered in the going-forward level. In that process, the electrification is a one big disruption we will see in the coming years. And I'm happy to say, I did talk to you about electrification. We are very well positioned in terms of electrification there. The electrification vehicles will be supplied by the existing volumes. Are -- there are at least 20, 25 new people wants to make commercial vehicles in India and we are very well positioned with all of them, whether they want to use our conventional axle for, probably, remote mount application, or if they want to use, e-axle. We are very well positioned and we will smoothly transition whenever the transition happens, whether the electrification will be 20%, 30%, 50%, 100% over next 5, 7, 10, 15 years. We are very well positioned to go through the transition, and it will be smooth for us.

Can you cover, in terms of outsourcing and exports....

Sorry to intercept Mr. Sunil Kothari, can you please come back in the queue, sir? Our next question comes the line of Mr. [ Viraj Kacharia ].

Congratulations for good set of numbers. First is, I kind of missed -- you said something on the outlook in terms of what we expect for the CE phase-in Q4 and FY '22? And second is, in terms of new products, which you said is still at a drawing growth. So will this largely be in the CV-related space? Or are we kind of looking at other market segments as well? And third is just to do on the new product as well. Are these kind of developed and kind of -- design and developed in-house or we are kind of leveraging the kind of technology or support from Meritor or leasing products?

Easy question. First, we will not diversify outside of commercial vehicle. Whatever we do, we will do within the commercial vehicle space, both, which is truck and bus and light and medium and heavy. The second question, in terms of the future outlook. Next fiscal year, our estimation is 7.5 ton and above, at least 50% market growth. And we are already seeing that kind of a number happening in the last quarter and also this quarter. And looking into the what the order book the OEMs has and we have, which we are a little bit of struggling to deliver because of the steel and supply chain issues. And also what happened during the budget and overall economic growth, et cetera. At this point of time, we know that market is extremely volatile, and sometimes it's very optimistic, sometimes it's very pessimistic. But given our product chain, next year, it would be at least 50% to 60% growth.

Okay. And the new products which we are looking to, which are still in the drawing board for us, are these kind of -- so is the thought process largely from the India entity and we're kind of looking to develop a -- or these are kind of driven from the support from the parent and then we're kind of leveraging on that?

We are 100% leveraging the parent company. I will give you one small example. We -- Meritor has bought a company called Trans Forward. They were into 100% electrification solution provider based out of San Francisco. He won the company at this point of time and we are into fully electrical solution providing company. We are utilizing all those capabilities. And all the time, it means new product development activities, we will use Meritor's support and the capability, and we don't want to duplicate those things in automotive access. So to answer simply, yes, we are going to use 100% leverage the existing capability globally, we have.

Okay. Just last one more question, if I can squeeze in. On the raw material inflation, you talked about supply chain issues and shortage of steel itself. And if you look at the overall inventory in the channel for major CE players itself is quitting. And they're also kind of struggling to meet the end demand. So are we getting a much -- is the RM cost pass to inflation now relatively more smoother than what you've seen in the past sectors because given the way the challenges is and the demand itself is quite strong. So just trying to understand what kind of pass-through we would have got by now? Or how should one look at the contribution margins?

I think if you're -- I'm sure that you all know, the -- already the steel prices are a little bit of softening. It went up through the roofs in last few months and few quarters. Now I think it is settling down. So my -- our personal view is it will settle down with the normal steel inflation, which is going to happen. It is going to set it up.

But in terms of pass-through of price increase, have you got anything from the OEs? Or will that be good enough to cover the inflation we have seen so far in Q3.

I think one good news for us is overall, commodity cost, which may be the steel in our case: One, we have an agreement with the back-to-back pass-through with the customers. There will be some lags, because of which we will have some issues. But on an absolute number basis, it is covered.

The next question is from the line of Mr. Prateek Poddar from Nippon India Mutual Fund.

Sir, just wanted to check, when we look at this quarter's MSC industry growth ex buses, right? The growth has been very healthy. In fact, like a TV has grown on a Y-o-Y basis at 66%, IRCs, we had grown by 24%. So the question is, have you seen -- I mean, because my understanding would be in buses, we would have very low share. Have you really seen an increase in content or this quarter or it's mostly driven by this mix change only?

Content point, not much, maybe a little bit of BS-VI content is little higher and the upgradation of products has happened. What I mean by upgradation of product is if, for example, before it raised the volumes we're using, say, size as 50 with the BS-VI coming in, but size 50, they're using their size 60, which means that they're watching accent they're using. Obviously, higher versions of axles are costlier than the lower versions. That way, we are getting benefited. That's one benefit we are seeing. And you are talking about buses. I think buses -- we're not seeing a historical level in buses because of the schools are not have opened and then IT companies have at open. So nobody is buying buses.

That is exactly my question, sir, that the growth which we saw -- or say, when you say that you will outperform or we will outperform industry by 15%. Is it because our share in buses is much lower versus truck. And this year, buses has been an abnormally high, decline in terms of number of volumes sold because of corona, which will not be there next year. So just trying to get to that?

No. I think our bus penetration is also at a decent level compared to truck. We don't know if there is a mix change between bus and truck.

Got it. So sir, then these pointers, as you highlighted in terms of exports, increased share of business plus a higher side of business in the axles and breaks, that is the main driver for outperformance over the industry, right? That is the way to sum it up?

Correct.

Okay. Sir, second question is when I look at your revenue growth this quarter, it is up 64%, as highlighted in the presentation, but the operating average benefits have not played out in terms of EBITDA margin. So EBITDA margins are at, say, roughly 9.9%, 10% versus last year's same time. Any specific reason for this?

Ranga, you want to answer that?

Yes. I think yes, your observation is right. There are two factors, by and large, I would like to highlight here, only because the commodity, the price increase that we have accommodated in our system that are creating the kind of base impact in terms of the percentage per se. So that is -- and secondly, it's about -- I received, last year in the same quarter, we had some provisions, which we carried in the books, which we are not -- no more required. We have taken the benefit in the last year, which is the last year of the results. So these 2 exceptions is what it shows in terms of the percentage, it's probably at par with the last year. It's not commensurate-ing this revenue growth. But if you remove 2 exceptions, I think this quarter really outperformed and it really to the leverage of fixed costs as well as the commission costs and metal cost improvements really in improved EBITDA.

Got it. And lastly, just wanted to check, is it fair to say that the next quarter, you would pass on the inflation cost -- inflation increase if we saw this quarter to the OEMs. And hence, the benefits which we couldn't see this quarter will get reflected in the next quarter.

No. See, as a growth, the market is going to grow, and we're going to grow, definitely, you'll see much better EBITDA in the coming quarters. That's for sure. So that's the thing, the commodity increase, we are seeing it in 2 stages. Stage 1, we accommodate it in the system. So as a matter of fact, when we accommodate it, it will create a business. Absolute value, we have outgrown, really. You really see absolute value EBITDA, we've grown by 62% compared to last year. So in terms of percentage, it is giving a base impact. It's a kind of an initiating factor because of the 0.6% to 0.7% which really impacted the user there. That's what I'm trying to explain. The next quarter, when it goes, probably, as far as the commodity increase is going to continue next quarter also, probably, we might have some base impact. But definitely, the revenue growth would be able to support us to sustain or show a better percentage in terms of EBITDA. But you also need to judge that benefit as it's growing the absolute values. These absolute values will definitely commensurate deferral.

The next question is from the line of [ Pritesh Chheda ].

Yes, sir, I have 2 questions. One is if you'd help us on a 3-year basis, I was just actually looking at -- we didn't have exports in the revenue. So on a 3-year basis, whatever orders or whatever plan of action that we have put in, what should the export number be, if you could help us? Because that would be a growth over and above the CE growth in India. And the new products that we are introducing, what should that add as revenues over the next 3 years. Yes.

Again, we don't use the segment wise to break up [indiscernible].

So actually seeking outlook, because these revenues never existed when I was looking at '20, there was 0 exports. So it's a number which will build up over the next 3 years based on the inquiries or orders that you have in it.

No, I don't think export was 0 ever. I think given that proportionate will keep on changing, the other export grows more just as a percentage while domestic and export will grow in any different -- depending upon the different regional markets, et cetera. I think our focus, as we always keep telling the -- export is one in a very key segment for us. We want to continue to grow and outperform in export. That, of course, is not related directly to the Indian market. But in our terms, how much year-over-year, we grow export, that's one of the metrics we follow. And then the new other one is, as I said, the industrial, which is often a military vertical we want to grow. And that is the second important vertical we want to grow in the future. And then how do we bring new products like suspension and other things we spoke about. We are evaluating a lot of other products to see that they come into the market. I think it's multifold to see what -- where the growth is going to come from for the next 5 years.

Okay. I'll ask the question either way, Is it going to be literally large over the next 2, 3 years?

No. It is not going to be significantly large. The only thing I can tell you is compared to the market, we probably, overall as a business entity, compared to the market, we continue compare to the market.

The second question is whenever you see us your prior structure, I see a lot of variable costs. So we have a 30% gross margin. But if I try to look at the contribution margin, it would be closer to about 20%, 22%. Is it fair to assume that scale, bringing in operating leverage may not be a significant number as one of the participants was highlighting why we are not 15% to 20% margin? The structure of your costing suggests that the operating leverage benefit is there, but it is not a significant number.

Ranga, you want to take the question?

Yes. No. I think that our opinion is definitely volumes are definitely providing a good amount of leverage. And now there are variable and fixed costs, probably in the steady results, even though you may not be able to significantly see the difference. But definitely, what is variable, of course, it grows with the volumes. There is also a lot of improvements as Ranga has mentioned earlier, a lot of strategic initiatives working on it. That is also yielding results. Second is about -- on the fixed cost side, definitely good amount of leverage we are seeing it here. So the first quarter has been -- I know we are just required from the COVID impact. So hopefully, you'll see the coming leverage will be coming so.

Can you share the fixed cost -- absolute fixed cost of our business?

No, we don't share that breakdown like that. But definitely, as a management perspective, I can say that leverage is there in the system. We have to see this question, which I also highlighted the exceptions because only the metal cost, the commodity price increase is creating kind of an impact in terms of percentage and also that onetime benefit last year we had. Probably, if you see that quarter-on-quarter the leverage is coming in, and we're able to map it. So generally, we don't give the breakdown.

Lastly, sir, this employee 2,000 number and the operating utilization of 50%, does this also go hand in hand? Or at 2,000 number workforce, you can still operate at 100%?

Come again, I'm not able to follow you.

One, you said that the workforce that we have is about 2000, and the capacity utilization that we saw in the last quarter gone by was 50%. So when you scale up from 50% to 100% capacity utilization, the employee cost also move linearly or doesn't move linearly and the employee count moves linearly or will not move?

Yes, that motion's definitely the fixed element of the employee cost definitely in benefit in that -- regulatory benefit will definitely come. But if I have to put in, employee cost, there are 2 portions. One is the employees were clearly variable like the employees responsible for the day-to-day option, et cetera. Then, of course, all the management people, et cetera, they are fixed. So we will get it in the fixed employee cost, and we will -- the variable cost will continue to be a variable.

The next question is from the line of Mr. Sunil Kothari from Unique Investments.

My question is to Mr. Thimmaiah. Sir, we had got one chance to exports and outsourcing mobility from Thailand Volvo. So would you like to talk more about this type of opportunity we've newly got maybe during this year or last year? Any new development, which is hoping for supplying to global this type of customer, if you can talk a little bit more?

I think that is one of that. As I always say, that is one of the focus areas to that it fit directly to the volumes, mainly in -- from the European perspective. But unfortunately, we have -- there are a lot of inquiries we were working on, but the COVID took everything into the backseat. Now the volumes want everybody operating at a very low capacity utilization. So -- and they want to -- and also, we are not able to meet people, not travel. I think that's really impacted some of the new opportunities and the delayed it quite some time. So I think once we -- the things become fitting, more normal when we are able to travel, et cetera, I think that will start opening up. So we -- the answer, yes, the focus is there, but it all took a little bit of backseat because of the threat of pandemic, but in the going forward, we will continue to focus on those.

And sir, my last question is related to Slide #6, which talks about products and return increasing 10%. That chart talks about increasing production by 25% over quarter 3. We are forecasting higher production by 25% compared to quarter 3. So why we are talking about just 10% revenue growth? Can you, a little bit, explain.

Hold on a second. Sorry, where is that?

Slide #6. Products on rate on increasing trend. That's the one chart which talks about increasing production, 25% compared to quarter 3 or quarter 4. That is your forecast. And we are talking about quarter 3 revenue will grow by -- I mean, quarter 4 revenue expected to grow by just around 10%. So why this difference? I'm not able to understand.

No, 10%,very interesting, but I'm not able to see, so maybe see it...